Denison Mines Corp. Reports 2009 Results
Company:
Denison Mines Corp.
Title:
Denison Mines Corp. Reports 2009 Results
Text:
TORONTO, ONTARIO--(Marketwire - March 11, 2010) - Denison Mines Corp. ("Denison" or the "Company") (TSX:DML)(NYSE Amex:DNN) today reported its financial results for the three months and year ended December 31, 2009. All amounts in this release are in U.S. dollars unless otherwise indicated. For a more detailed discussion of the Company's financial results, see management's discussion and analysis ("MD&A"), a copy of which is attached to this release.
Financial Highlights
Operating Highlights
Financial Summary
Revenue
Uranium sales revenue for the fourth quarter was $24,800,000. Sales from U.S. production were 350,000 pounds U3O8 at an average price of $43.23 per pound. Sales of Canadian production were 198,000 pounds U3O8 at an average price of $45.75 per pound. Uranium sales revenue also includes amortization of the fair value increment related to the Denison Mines Inc. ("DMI") sales contracts totaling $622,000 for the quarter.
Uranium sales revenues for the year were $59,889,000. Sales from U.S. production were 635,000 pounds U3O8 at an average price of $53.04 per pound. Sales of Canadian production were 492,000 pounds U3O8 at an average price of $48.76 per pound. Amortization of the fair value increment totaled $2,313,000 for the year.
Uranium sales revenue in the fourth quarter of 2008 totaled $34,812,000. Sales from U.S. production were 400,000 pounds U3O8 at an average price of $61.50 per pound. Sales of Canadian production were 177,000 pounds U3O8 at an average price of $52.28 per pound. Amortization of the fair value increment related to long-term sales contracts from the acquisition of DMI totaled $859,000. Uranium sales revenues for the 2008 year were $114,588,000, with sales of U.S. production of 920,000 pounds U3O8 at an average price of $67.27 per pound, and sales of Canadian production were 743,000 pounds U3O8 at an average price of $57.40 per pound. Amortization of the fair value increment related to long-term sales contracts from the acquisition of DMI totaled $9,449,000.
During the three months ended December 31, 2009, the Company sold 11,000 pounds of vanadium blackflake ("V2O5") at an average price of $6.00 per pound and 142,000 pounds of ferrovanadium ("FeV") at an average price of $10.96 per pound. Total vanadium sales revenue was $1,617,000. During the year ended December 31, 2009, the Company sold 520,000 pounds V2O5 at an average price of $3.73 per pound and 229,000 pounds of FeV at an average price of $11.09 per pound. Total vanadium sales revenue was $4,480,000. No vanadium was sold in 2008.
Revenue from Denison's environmental services division was $3,985,000 for the three months ended December 31, 2009 compared to $1,633,000 in the comparable 2008 period and for the year were $12,226,000 compared to $5,562,000 for the year in 2008. The increase in revenue is due to the increased activity related to the Company's contract with the Yukon government for site maintenance and water treatment for the FARO mine site in Yukon which was signed in late 2008. Revenue from the management contract with Uranium Participation Corporation was $636,000 for the three months and $2,522,000 for the year ended December 31, 2009 compared to $318,000 and $2,929,000 in the same periods in 2008.
Operating Expenses
Canadian Operations
The McClean Lake Joint Venture produced 934,000 pounds U3O8 for the three months ended December 31, 2009 and 3,609,000 pounds U3O8 for the year ended December 31, 2009 compared with 682,000 pounds U3O8 for the three months ended December 31, 2008 and 3,248,000 pounds U3O8 for the year ended December 31, 2008. Denison's 22.5% share of production totaled 210,000 and 812,000 pounds respectively for the 2009 periods compared to 154,000 and 731,000 pounds for the corresponding 2008 periods.
Production costs were $50.47 per pound U3O8 for the quarter and $45.49 per pound for the year ending December 31, 2009. For comparable periods in 2008, the production costs were $57.99 and $55.29 per pound U3O8. Production costs, less amortization, depletion and depreciation for the quarter and the year ending December 31, 2009 were $19.99 per pound and $19.49 per pound, respectively. Comparative costs for the same periods in 2008 were $28.71 per pound and $23.19 per pound.
Inventory available for sale from Canadian production was 342,000 pounds U3O8 at December 31, 2009.
U.S. Operations
At the White Mesa mill, processing of alternate feed material began in early June using the newly constructed alternate feed circuit. Production from alternate feed material in the three months and year ended December 31, 2009 was 107,000 and 191,000 pounds U3O8, respectively. Processing of conventional ore ceased in May 2009, yielding a total of 423,000 pounds U3O8. Total production year to date from both alternate feed and conventional ore was 614,000 pounds U3O8. Processing of conventional ore at White Mesa is expected to resume in March, 2010. Production was 485,000 pounds U3O8 for the three months and 885,000 pounds U3O8 for the year ended December 31, 2008. The Company produced 501,000 and 1,223,000 pounds V2O5 for the years ended December 31, 2009 and 2008 respectively.
At December 31, 2009, a total of 174,000 tons of conventional ore was stockpiled at the mill containing approximately 706,000 pounds U3O8 and 3,600,000 pounds V2O5. The Company also has approximately 638,000 pounds U3O8 contained in the alternate feed material stockpiled at the mill at December 31, 2009.
Production costs for the three months ended December 31, 2009 were $52.06 per pound U3O8 equivalent. Deducting depletion, amortization and depreciation yields a production cost of $39.52 per pound. The production costs for the year ended December 31, 2009 were $70.26 per pound U3O8 equivalent. Deducting depletion, amortization and depreciation yields a production cost of $37.62.
Inventory available for sale from U.S. production was 142,000 pounds U3O8, 773,000 pounds V2O5, and 2,000 pounds FeV at December 31, 2009.
Other
Operating costs for the year ended December 31, 2009 include an expense of $3,712,000 (2008-$9,500,000) relating to the net realizable value of the Company's uranium and vanadium inventory. Operating expenses also include costs relating to Denison's environmental services division amounting to $3,886,000 in the three month period and $11,432,000 for the year ended December 31, 2009 and $1,373,000 and $5,188,000 in the comparable periods in 2008.
Impairment of Mineral Properties
During the third quarter, the Company determined that it should take an impairment charge against the carrying value of its mineral property investment in Zambia and has accordingly recorded a write-down of $100,000,000. The impairment recognizes a decline in the long-term uranium price outlook and refinements in the mine plan and project cost estimates. The impairment charge was determined based on comparisons of current market values of similar properties. The Company also recorded a future income tax recovery of $30,000,000 as a result of the impairment charge. The Company continues to work towards a production decision for the project.
Impairment of Goodwill
Denison evaluates the carrying amount of goodwill annually to determine whether events or changes in circumstances indicate whether such carrying amount has become impaired. Denison's goodwill amount arises from the acquisition of DMI in 2006. The goodwill was allocated to the Canadian mining segment. Denison examined the fair value of the assets and liabilities of the segment at December 31, 2009. The determination of fair market value was based on discounted cash flow analysis for production assets using consensus expectations for future uranium prices and foreign exchange, future costs and a discount rate of 10.5%. Exploration properties were valued at estimated market value at December 31, 2009. Based on this analysis, the Company determined the fair values have decreased and, as a result, determined that an impairment charge of $22,136,000 should be made and charged to operations in the fourth quarter.
Mineral Property Exploration
Denison is engaged in uranium exploration, as both operator and non-operator of joint ventures and as operator of its own properties in Canada, the U.S., Mongolia and Zambia. For the three months ended December 31, 2009 exploration expenditures totaled $2,553,000, and totaled $10,120,000 for the year ended December 31, 2009 as compared to $2,080,000 and $20,114,000 for the three months and year ended December 31, 2008.
A majority of the exploration expenditures during 2009 were spent in the Athabasca Basin region of northern Saskatchewan. Denison is engaged in uranium exploration as part of the ARC operated McClean and Midwest joint ventures, as well as on 29 other exploration projects including the Company's 60% owned Wheeler River project. Denison's share of exploration spending on its Canadian properties totaled $2,330,000 of which $2,297,000 was expensed in the statement of operations for the three months ended December 31, 2009 and totaled $8,330,000 of which $7,726,000 was expensed in the statement of operation for the year ended December 31, 2009. For the three months ended December 31, 2008, Canadian exploration spending totaled $733,000 of which $624,000 was expensed and totaled $12,943,000 of which $11,953,000 was expensed for the year ended December 31, 2008.
The results of the three 2009 drilling programs, on the Wheeler River property in the Athabasca Basin, have confirmed that the Phoenix discovery has the potential to host an economically significant, high-grade uranium deposit. In 2009 43 holes were drilled totalling 19,000 metres, with the drilling primarily focussed on the Phoenix discovery. The uranium mineralization extends over a one kilometre strike length and remains open in both directions at a depth of approximately 400 metres.
During the winter program, the first indications of high grade mineralization were identified in hole WR-258 which intersected 11.2% U3O8 over 5.5 metres. The summer drill program included the best intersection to date of 62.6% U3O8 over 6 metres in hole WR-273. The best intersections of the fall program were 32.8% eU3O8, 16.8% U3O8, 12.74% U3O8 and 8.02% U3O8 over 7.6, 9.0, 3.0 and 5.0 metres in holes WR-287, 286, 291A and 290, respectively.
Exploration expenditures of $121,000 for the three months ended December 31, 2009 ($916,000 for the three months ended December 31, 2008) and of $2,054,000 for the year ended December 31, 2009 ($4,436,000 for the year ended December 31, 2008) were incurred in Mongolia on the Company's joint venture properties. The Company has a 70% interest in the Gurvan Saihan Joint Venture ("GSJV") in Mongolia. The other parties to the joint venture are the Mongolian government as to 15% and Geologorazvedka, a Russian government entity, as to 15%. At the Ulzit project, mineralization first discovered in 2008 was followed up on and further continuity of this mineralization was confirmed. A new zone of mineralization was discovered at the Choir Depression. Both of these areas of mineralization will require further drilling to confirm potential resources.
In Zambia, the environmental report was approved by the Government of Zambia and work continued on the mining licence and radioactive licence applications.
Liquidity
The Company had cash and cash equivalents of $19,804,000 at December 31, 2009, trade and other receivables of $13,773,000 and portfolio investments with a market value of $10,605,000. The Company has in place a revolving credit facility of $60,000,000 which will be used primarily for working capital purposes. The term of the facility is to June 30, 2011. Bank indebtedness under the facility at December 31, 2009 was nil; however, $9,228,000 of the line is used as collateral for certain letters of credit.
Outlook for 2010
Mining and Production
Denison has used a U3O8 spot price of $49.00 per pound and a long-term price of $64.00 per pound, a V2O5 price of $5.75 per pound and a foreign exchange rate of US$1.00 equals CDN$1.075 in developing this outlook.
For each $5.00 per pound change in the U3O8 spot price, the revenue changes by $4.8 million and a $4.00 change in the long-term price changes revenue by $2.3 million. A $1.00 per pound change in the vanadium price results in a $3.4 million change in revenue. A $0.01 change in the foreign exchange rate changes cash flow by $0.2 million.
Conference Call
Denison is hosting a conference call on Friday, March 12, 2010 starting at 10:00 A.M. (Toronto time) to discuss the 2009 results. The webcast will be available live through a link on Denison's website www.denisonmines.com and by telephone at 416-340-8061. A recorded version of the conference call will be available by calling 416-695-5800 (password: 4234716) approximately two hours after the conclusion of the call. The presentation will also be available at www.denisonmines.com.
Additional Information
Additional information on Denison is available on SEDAR at www.sedar.com and on the Company's website at www.denisonmines.com.
About Denison
Denison Mines Corp. is an intermediate uranium producer in North America, with mining assets in the Athabasca Basin region of Saskatchewan, Canada and the southwest United States including Colorado, Utah, and Arizona. Further, the Company has ownership interests in two of the four conventional uranium mills operating in North America today. Denison also has a strong exploration and development portfolio with large land positions in the United States, Canada, Mongolia and Zambia.
Cautionary Statements
Certain information contained in this press release constitutes "forward-looking information", within the meaning of the United States Private Securities Litigation Reform Act of 1995 and similar Canadian legislation concerning the business, operations and financial performance and condition of Denison.
Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved".
Forward looking statements are based on the opinions and estimates of management as of the date such statements are made, and they are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Denison to be materially different from those expressed or implied by such forward-looking statements. Denison believes that the expectations reflected in this forward-looking information are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking information included in this press release should not be unduly relied upon. This information speaks only as of the date of this press release. In particular, this press release may contain forward-looking information pertaining to the following: the estimates of Denison's mineral reserves and mineral resources; uranium and vanadium production levels; capital expenditure programs, estimated production costs, exploration expenditures and reclamation costs; expectations of market prices and costs; supply and demand for uranium and vanadium; possible impacts of litigation on Denison; exploration, development and expansion plans and objectives; Denison's expectations regarding raising capital and adding to its mineral reserves through acquisitions and development; and receipt of regulatory approvals and permits and treatment under governmental regulatory regimes.
There can be no assurance that such statements will prove to be accurate, as Denison's actual results and future events could differ materially from those anticipated in this forward-looking information as a result of those factors discussed in or referred to under the heading "Risk Factors" in Denison's MD&A dated march 11, 2010, its Annual Information Form dated March 26, 2009, its Short Form Prospectus dated June 15, 2009, all of which are available at http://www.sedar.com, and in its Form 40-F available at http://www.sec.gov, as well as the following: global financial conditions, the market price of Denison's securities, volatility in market prices for uranium and vanadium; ability to access capital, changes in foreign currency exchange rates and interest rates; liabilities inherent in mining operations; uncertainties associated with estimating mineral reserves and resources; failure to obtain industry partner and other third party consents and approvals, when required; delays in obtaining permits and licences for development properties; competition for, among other things, capital, acquisitions of mineral reserves, undeveloped lands and skilled personnel; incorrect assessments of the value of acquisitions; and geological, technical and processing problems, the ability of Denison to meet its obligations to its creditors, the potential influence of or reliance upon a business partner, and the adequacy of insurance coverage
Accordingly, readers should not place undue reliance on forward-looking statements. These factors are not, and should not be construed as being, exhaustive. Statements relating to "mineral reserves" or "mineral resources" are deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions that the mineral reserves and mineral resources described can be profitably produced in the future. The forward-looking information contained in this press release is expressly qualified by this cautionary statement. Denison does not undertake any obligation to publicly update or revise any forward-looking information after the date of this press release to conform such information to actual results or to changes in Denison's expectations except as otherwise required by applicable legislation.
Cautionary Note to United States Investors Concerning Estimates of Measured, Indicated and Inferred Resources: This news release may use the terms "Measured", "Indicated" and "Inferred" Resources. United States investors are advised that while such terms are recognized and required by Canadian regulations, the United States Securities and Exchange Commission does not recognize them. "Inferred Mineral Resources" have a great amount of uncertainty as to their existence, and as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or other economic studies. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.
Qualified Person
The disclosure of scientific and technical information regarding Denison's properties in the MD&A was prepared by or under the supervision of William C. Kerr, the Company's Vice-President, Exploration, who is a Qualified Person in accordance with the requirements of National Instrument 43-101.
INTRODUCTION
This Management's Discussion and Analysis ("MD&A") of Denison Mines Corp. and its subsidiary companies and joint ventures (collectively, "Denison" or the "Company") provides a detailed analysis of the Company's business and compares its financial results with those of the previous year. This MD&A is dated as of March 11, 2010 and should be read in conjunction with, and is qualified by, the Company's audited consolidated financial statements and related notes for the year ended December 31, 2009. The financial statements are prepared in accordance with generally accepted accounting principles in Canada with a discussion in Note 26 of the material differences between Canadian and United States generally accepted accounting principles and practices affecting the Company. All dollar amounts are expressed in U.S. dollars, unless otherwise noted.
Other continuous disclosure documents, including the Company's press releases, quarterly and annual reports, Annual Information Form and Form 40-F are available through its filings with the securities regulatory authorities in Canada at www.sedar.com and the United States at www.sec.gov/edgar.shtml
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information contained in this MD&A constitutes "forward-looking information", within the meaning of the United States Private Securities Litigation Reform Act of 1995 and similar Canadian legislation concerning the business, operations and financial performance and condition of Denison.
Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved".
Forward looking statements are based on the opinions and estimates of management as of the date such statements are made, and they are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Denison to be materially different from those expressed or implied by such forward-looking statements. Denison believes that the expectations reflected in this forward-looking information are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking information included in this MD&A should not be unduly relied upon. This information speaks only as of the date of this MD&A. In particular, this MD&A may contain forward-looking information pertaining to the following: the estimates of Denison's mineral reserves and mineral resources; uranium and vanadium production levels; capital expenditure programs, estimated production costs, exploration expenditures and reclamation costs; expectations of market prices and costs; supply and demand for uranium and vanadium; possible impacts of litigation on Denison; exploration, development and expansion plans and objectives; Denison's expectations regarding raising capital and adding to its mineral reserves through acquisitions and development; and receipt of regulatory approvals and permits and treatment under governmental regulatory regimes.
There can be no assurance that such statements will prove to be accurate, as Denison's actual results and future events could differ materially from those anticipated in this forward-looking information as a result of those factors discussed in or referred to under the heading "Risk Factors" in Denison's Annual Information Form dated March 26, 2009, the Short Form Prospectus dated June 15, 2009, available at http://www.sedar.com and its Form 40-F available at http://www.sec.gov, as well as the following: volatility in market prices for uranium and vanadium; changes in foreign currency exchange rates and interest rates; liabilities inherent in mining operations; uncertainties associated with estimating mineral reserves and resources; failure to obtain industry partner and other third party consents and approvals, when required; delays in obtaining permits and licences for development properties; competition for, among other things, capital, acquisitions of mineral reserves, undeveloped lands and skilled personnel; incorrect assessments of the value of acquisitions; and geological, technical and processing problems.
Accordingly, readers should not place undue reliance on forward-looking statements. These factors are not, and should not be construed as being, exhaustive. Statements relating to "mineral reserves" or "mineral resources" are deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions that the mineral reserves and mineral resources described can be profitably produced in the future. The forward-looking information contained in this MD&A is expressly qualified by this cautionary statement. Denison does not undertake any obligation to publicly update or revise any forward-looking information after the date of this MD&A to conform such information to actual results or to changes in Denison's expectations except as otherwise required by applicable legislation.
Cautionary Note to United States Investors Concerning Estimates of Measured, Indicated and Inferred Resources: "This MD&A" may use the terms "Measured", "Indicated" and "Inferred" Resources. United States investors are advised that while such terms are recognized and required by Canadian regulations, the United States Securities and Exchange Commission does not recognize them. "Inferred Mineral Resources" have a great amount of uncertainty as to their existence, and as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or other economic studies. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.
2009 HIGHLIGHTS
ABOUT DENISON
Denison was formed by articles of amalgamation effective May 9, 1997 pursuant to the Business Corporations Act (Ontario) (the "OBCA") and by articles of arrangement effective December 1, 1006. Denison is a reporting issuer in all of the Canadian provinces. Denison's common shares are listed on the Toronto Stock Exchange (the "TSX") under the symbol "DML" and on the NYSE Amex LLC ("Amex") under the symbol "DNN".
Denison is a diversified, intermediate uranium producer with uranium production in both the U.S. and Canada and development projects in the U.S., Canada, Zambia and Mongolia. Denison's assets include an interest in 2 of the 4 licensed and conventional uranium mills currently operating in North America, with its 100% ownership of the White Mesa mill in Utah and its 22.5% ownership of the McClean Lake mill in Saskatchewan. The Company also produces vanadium as a co-product from some of its mines in Colorado and Utah. The Company is also in the business of processing uranium-bearing waste materials, referred to as "alternate feed materials", for the recovery of uranium, alone or in combination with other metals, at the Company's White Mesa mill.
Denison owns interests in a portfolio of exploration projects, including the Wheeler River property along with other properties in close proximity to the Company's mills in the Athabasca Basin in Saskatchewan and in the Colorado Plateau, Henry Mountains and Arizona Strip regions of the southwestern United States.
Denison is the manager of Uranium Participation Corporation ("UPC"), a publicly traded company which invests in uranium oxide in concentrates and uranium hexafluoride. Denison is also engaged in mine decommissioning and environmental services through its Denison Environmental Services ("DES") division.
Strategy
Denison intends to position the Company as an important global uranium producer with annual uranium production of not less than 10 million pounds by 2020 at the latest. This will take place through production from Denison's currently operating mines and through its ongoing business development activities, including exploration and development of existing projects. Denison will also look to diversify its production geographically and evaluate opportunities to make in-situ uranium recovery a larger component of its production.
The Uranium Industry
Nuclear power capacity and power generation is growing significantly, while uranium production is struggling to catch up after many years of low prices and limited exploration for new deposits required to support the growth of nuclear power and to replace depleting ore bodies. As a result, there is a tight long-term supply-demand balance which can be expected to continue for the foreseeable future. Prices must rise to higher, sustained levels to support the new mines required to meet the increasing demand.
Uranium Demand
There are currently 436 nuclear reactors operating worldwide in 30 countries, generating 372.6 gigawatts of electricity and supplying 15% of the world's electrical requirements. Of greater significance, 53 nuclear reactors are under construction in 13 countries with the principal drivers of this expansion being China, India, South Korea and Russia which have a total of 40 reactors under construction. China, in particular, has a very aggressive new build program underway. By 2020, it is estimated that there will be 570 nuclear reactors in operation worldwide, supplying 518.5 gigawatts. This would represent an increase of over 30% in only 10 years, with 11 new countries joining the nuclear family.
Nuclear reactors are very capital intensive; therefore economics dictate that they need to be operated to the maximum as base-load power. As a consequence, demand for uranium is nearly non-elastic. Ux Consulting ("UxCo") has estimated in its "Uranium Market Outlook - Q1 2010", that uranium demand will grow from 185 million pounds of U3O8 in 2009 to 247.3 million pounds in 2020.
While long-term demand is steadily growing, short-term demand is affected in a large part by utilities' uncovered requirements. Utilities normally purchase the majority of their fuel requirements under long-term contracts. To the extent that they have uncovered demand in the near term, they will purchase on the spot market which in turn affects the spot price. Currently, there is relatively low uncovered demand so utility buying is purely discretional and price driven.
Primary Uranium Supply
Uranium supply is the biggest variable in the supply-demand equation. During the time that the accumulated inventories from over production in the 1970s were being drawn down, primary mine production accounted for only approximately 50% of demand. A number of new mines have been brought into production over the last few years while others are in various stages of development. However, production still only accounts for approximately 70% of demand and many more are required to meet the increasing future demand and to replace mines that are being depleted.
UxCo has estimated in its "Uranium Market Outlook - Q1 2010" that existing mine production plus new planned and potential mine production will increase primary uranium supply from 131.8 million pounds in 2009 to 210.4 million pounds in 2020, falling short of expected demand of 247.3 million pounds per year. The principal driver for the increase in primary mine production is expected to be Kazakhstan, which is projected to nearly triple production between 2008 and 2020. However prices will need to increase appreciably to support the additional higher cost production required to meet these production forecasts.
Secondary Uranium Supply
Primary mine production currently supplies less than 70% of demand. The balance of demand is supplied from secondary sources such as remaining excess commercial inventories, reprocessing of spent fuel, inventories held by governments and the downblending of highly-enriched uranium ("HEU") from nuclear weapons programs. By far, the most significant of the secondary supplies currently is the 18 to 24 million pounds per year being provided from the HEU downblending program. The HEU program is scheduled to terminate in 2013. The supply gap created by this termination will need to be made up from new primary mine production.
Excess commercial inventories, which were once one of the major sources of secondary supplies during the period from the early 1970s to the early 2000s, have largely been consumed. The disposition of government inventories held by the United States and Russia will have a market impact over the next 10 to 20 years; however, the rate and timing of this material entering the market is uncertain.
Reprocessing of spent fuel is another source of secondary supply but is expected to satisfy only 3 to 4% of demand. Expansion of this secondary source would require major investments in facilities which could only be supported by a significant increase in long-term prices.
UxCo expects that secondary sources of supply will fall from 52 million pounds to 19 million pounds per year from now to 2020.
Uranium Prices
Most of the countries that use nuclear-generated electricity do not have a sufficient domestic uranium supply to fuel their nuclear power reactors, and their electric utilities must secure their required uranium supply by entering into medium-term and long-term contracts with foreign uranium producers and other suppliers. These contracts usually provide for deliveries to begin two to four years after they are signed and provide for four to eight delivery years. In awarding medium-term and long-term contracts, electric utilities consider, in addition to the commercial terms offered, the producer's uranium reserves, record of performance and costs, all of which are important to the producer's or supplier's ability to fulfill long-term supply commitments. Prices are established by a number of methods, including base prices adjusted by inflation indices, reference prices (generally spot price indicators, but also long-term reference prices) and annual price negotiations. Contracts may also contain floor prices, ceiling prices and other negotiated provisions which affect the amount paid by the buyer to the seller. Under these contracts, the actual price mechanisms are usually confidential. Electric utilities procure their remaining requirements through spot and near-term purchases from uranium producers and other suppliers, including other utilities holding excess inventory and governments.
The long-term price rose from just under $11.00 per pound at the end of 2002 to a peak of $95.00 in May 2007 and remained at that level until mid-2008. Since then, it has steadily declined to $62.00 at the end of 2009. Long-term prices are driven more by production costs and the future supply-demand balance than by customer inventories. This is one of the reasons why a gap between long-term prices and spot prices exist.
Spot prices rose rapidly from a low of $7.10 per pound U3O8 in December 2000 to a peak of $136.00 per pound U3O8 in mid 2007 before declining and ending 2007 at $95.00 per pound U3O8. Spot prices in 2008 and 2009 have been very volatile but have generally continued to decline. The low price for 2009 was $40.00, reached in early April. Prices generally fluctuated during 2009, from the low $40s to the low $50s and ended the year at $44.50 per pound U3O8.
Competition
Uranium production is international in scope and is characterized by a relatively small number of companies operating in only a few countries. The top ten producers accounted for over 90% of the world's primary mine supply in 2009.
Nearly 70% of the world's production came from four countries, namely - Kazakhstan, Canada, Australia and Namibia. Kazakhstan passed Canada in 2009 as the largest producer.
Marketing Uranium
The sale of the majority of Denison's uranium is under long-term contracts. These long-term contracts have a variety of pricing mechanisms, including fixed prices, base prices adjusted by inflation indicies and/or spot price or long-term contract reference prices. Time of delivery during a year under long-term contracts is at the discretion of the customer, so the Company's delivery obligations may vary markedly from quarter to quarter.
In 2009, approximately 60% of the total sales volume was sold under long term contracts, with the remainder in the spot market. The Company currently has five long-term contracts in place. One is for the sale of the lesser of 50% of White Mesa mill production or 750,000 pounds in 2010 and 1,000,000 pounds in 2011, and then 32% of the production until a total of 2.5 million pounds have been delivered and then 17% of production until a total of 6.5 million pounds have been delivered. The sales price is 95% of the published long-term price for the month prior to delivery with a floor price of $45.00. This contract is for a total of 6.5 million pounds, of which by the end of 2009, 535,000 pounds have been delivered. The second contract is for 20% of the Company's annual production from any production source (+/-10%) but not less than 350,000 pounds (+/-10%) per year from 2010 to 2015 inclusive. The purchase price per pound is based on industry standard terms. This agreement also provides for the purchase of 20% of production after 2015 subject to certain conditions. The third contract is for delivery of 1,000,000 pounds of U3O8 from U.S. or Canadian production over a period of five years beginning in 2011. The price under the contract is a combination of an escalated base price and published market price indicators at the time of delivery subject to escalated floors and ceilings. The fourth contract is for 20% of production from the White Mesa mill during the years 2012 to 2017 inclusive, but not less than 200,000 pounds per year. The price per pound under this contract is 95% of the long-term price at the time of delivery with an escalated floor price. Finally, Denison has one joint contract with ARC under which Denison will deliver 49,000 pounds from its Canadian production in 2010. This contract is priced based on the average quoted spot price over the quarter prior to delivery.
Denison will continue to seek long-term contracts at prices sufficient to support the development of its mineral assets.
The Vanadium Market
Steelmaking accounts for 93% of world vanadium consumption, and world steel production dropped from 1.5 billion metric tons in 2008 to under one billion metric tons in 2009. The chemical and titanium alloy industries normally consume 4% and 3% of supply, respectively, and reduced vanadium requirements in these sectors also occurred during this timeframe.
Approximately 20% of vanadium in the world is produced from primary ore from sources in China, Russia and South Africa. The remaining 80% is produced from secondary production, or processing of steelmaking slag, oil and coal residues, spent catalysts and uranium co-products. The only uranium co-product producer of vanadium in the world at this time is Denison.
Due to falling market prices and the high cost of production from primary ore, many of these facilities have shut down. The largest secondary producers from steelmaking slag are in Russia and South Africa, and output was either cut back or halted during the year. In spite of these cutbacks, producers' inventories increased due to the drop in demand, and market prices fell. It is unclear whether the more expensive primary ore production that was idled will restart, or will be permanently shut down. If the latter is the case, it will strengthen the position of suppliers such as Denison.
At present, China is the largest steel producer in the world, but has lagged behind the other leading steel producing nations in the inclusion of vanadium as a micro alloy. Several industry analysts anticipate that the construction of new infrastructure in China, India and Russia will create increased demand for vanadium, especially in commercial building construction, roads and bridges, and power generation plants and transmission systems throughout those nations. Were China to increase its vanadium consumption to match the average seen throughout the western world, vanadium requirements could potentially increase by approximately 116 million pounds vanadium blackflake ("V2O5") per year, from current requirements of about 250 million pounds V2O5 per year.
The Company expects that the lower level of prices seen for the past year and a half should begin to strengthen slowly throughout 2010 as buyers begin to restock their diminished inventories, provided economic recovery gradually improves and steel production begins to increase in the U.S., Europe and the Far East.
Vanadium Marketing
All of Denison's vanadium sales during 2009 have been spot market sales, primarily to industry trading and brokerage companies. During 2009, Denison worked to increase the market awareness and exposure of the Company throughout the world, and has had considerable success.
Denison also concluded sales of V2O5 for product analysis and qualification with companies involved in titanium alloys in the aircraft engine and airframe industry. As businesses become familiar with the Company's product and satisfy themselves that it is compatible with their processes, Denison expects to enter into long-term sales agreements.
SELECTED ANNUAL FINANCIAL INFORMATION
The following selected financial information was obtained directly from or calculated using the Company's consolidated financial statements for the years ended December 31, 2009, December 31, 2008 and December 31, 2007.
RESULTS OF OPERATIONS
General
The Company recorded a net loss of $147,012,000 ($0.51 per share) for 2009 compared with net loss of $80,648,000 ($0.42 per share) for 2008.
Revenues
Uranium sales revenue for the fourth quarter was $24,800,000. Sales from U.S. production were 350,000 pounds U3O8 at an average price of $43.23 per pound. Sales of Canadian production were 198,000 pounds U3O8 at an average price of $45.75 per pound. Uranium sales revenue also includes amortization of the fair value increment related to the Denison Mines Inc. ("DMI") sales contracts totaling $622,000 for the quarter.
Uranium sales revenues for the year were $59,889,000. Sales from U.S. production were 635,000 pounds U3O8 at an average price of $53.04 per pound. Sales of Canadian production were 492,000 pounds U3O8 at an average price of $48.76 per pound. Amortization of the fair value increment totaled $2,313,000 for the year.
Uranium sales revenue in the fourth quarter of 2008 totaled $34,812,000. Sales from U.S. production were 400,000 pounds U3O8 at an average price of $61.50 per pound. Sales of Canadian production were 177,000 pounds U3O8 at an average price of $52.28 per pound. Amortization of the fair value increment related to long-term sales contracts from the acquisition of DMI totaled $859,000. Uranium sales revenues for the 2008 year were $114,588,000, with sales of U.S. production of 920,000 pounds U3O8 at an average price of $67.27 per pound, and sales of Canadian production were 743,000 pounds U3O8 at an average price of $57.40 per pound. Amortization of the fair value increment related to long-term sales contracts from the acquisition of DMI totaled $9,449,000.
During the three months ended December 31, 2009, the Company sold 11,000 pounds of V2O5 at an average price of $6.00 per pound and 142,000 pounds of ferrovanadium ("FeV") at an average price of $10.96 per pound. Total vanadium sales revenue was $1,617,000. During the year ended December 31, 2009, the Company sold 520,000 pounds V2O5 at an average price of $3.73 per pound and 229,000 pounds of FeV at an average price of $11.09 per pound. Total vanadium sales revenue was $4,480,000. No vanadium was sold in 2008.
Revenue from the environmental services division was $12,226,000 compared to $5,562,000 in 2008. The increase in revenue is related to the Company's contract with the Yukon government for site maintenance and water treatment services for the Faro mine site in Yukon which was signed in late 2008. Revenue from the management contract with UPC was $2,522,000 compared to $2,929,000 in 2008.
Operating Expenses
Milling and Mining Expenses
The McClean Lake joint venture produced 934,000 pounds U3O8 for the three months ended December 31, 2009 and 3,609,000 pounds U3O8 for the year ended December 31, 2009 compared with 682,000 pounds U3O8 for the three months and 3,248,000 pounds U3O8 for the year ended December 31, 2008. Denison's 22.5% share of production totaled 210,000 pounds and 812,000 pounds respectively for the 2009 periods and 154,000 pounds and 731,000 pounds respectively for the 2008 periods.
Canadian production costs for the fourth quarter were $50.47 (CDN$53.35) per pound U3O8 including $30.48 (CDN$32.22) per pound U3O8 for amortization, depletion and depreciation costs compared to $57.99 (CDN$70.26) per pound U3O8 including $29.28 (CDN$35.47) per pound U3O8 for amortization, depletion and depreciation costs for the fourth quarter of 2008. For the year ended December 31, 2009, production costs were $45.49 (CDN$51.94) per pound U3O8 including $26.00 (CDN$29.69) per pound U3O8 for amortization, depletion and depreciation costs compared to $55.29 (CDN$58.94) per pound U3O8 including $32.10 (CDN$34.22) per pound U3O8 for amortization, depletion and depreciation costs for the year ended December 31, 2008.
Inventory from Canadian production was 342,000 pounds U3O8 at December 31, 2009.
On June 30, 2009, the Canadian Nuclear Safety Commission ("CNSC") renewed the operating licence for the McClean Lake operation for a period of eight years until June 30, 2017. The Athabasca Regional Government (the "ARG"), which is comprised of three First Nations and four provincial communities from the Athabasca Basin, launched a judicial review of CNSC's decision to grant the McClean Lake operating licence. The ARG is challenging the legality of the licence renewal on the basis of issues related to the Federal and Provincial governments' duty to consult with Aboriginal people. The operations should not be affected by the legal proceedings. An adverse decision by the court could have a significant adverse impact on the Company.
At the White Mesa mill, processing of alternate feed material began in early June using the newly constructed alternate feed circuit. Production from alternate feed material in the three months and year ended December 31, 2009 was 107,000 and 191,000 pounds U3O8, respectively. Processing of conventional ore ceased in May 2009, yielding a total of 423,000 pounds U3O8. Total production year to date from both alternate feed and conventional ore was 614,000 pounds U3O8. Processing of conventional ore at White Mesa is expected to resume in March of 2010. Production was 485,000 pounds U3O8 for the three months and 885,000 pounds U3O8 for the year ended December 31, 2008. The Company produced 501,000 and 1,223,000 pounds V2O5 for the years ended December 31, 2009 and 2008 respectively.
At December 31, 2009, a total of 174,000 tons of conventional ore was stockpiled at the mill containing approximately 706,000 pounds U3O8 and 3,600,000 pounds V2O5. The Company also has approximately 638,000 pounds U3O8 contained in the alternate feed material stockpiled at the mill at December 31, 2009.
Production costs for the three months ended December 31, 2009, including mill fixed and conventional ore stand-by costs were $52.06 per pound U3O8 equivalent. Deducting depletion, amortization and depreciation yields a production cost of $39.52 per pound. The production costs for the year ended December 31, 2009 were $70.26 per pound U3O8 equivalent. Deducting depletion, amortization and depreciation yields a production cost of $37.62.
Inventory available for sale from U.S. production was 142,000 pounds U3O8 and 773,000 pounds V2O5 and 2,000 pounds FeV at December 31, 2009.
On November 16, 2009, as amended on February 1, 2010, the Center for Biological Diversity, Grand Canyon Trust, Sierra Club and Kaibab Band of Paiute Indians ("the Plaintiffs") filed a lawsuit against the U.S. Secretary of the Interior and the U.S. Bureau of Land Management ("BLM") (together, the "Defendants") seeking an order declaring that the Defendants have violated environmental laws in relation to the Company's Arizona 1 mine, by not requiring a new Plan of Operations in connection with the start of mining activities. The Plaintiffs are also claiming that, if a new Plan of Operations is not required, the Defendants failed to conduct a review of potential environmental impacts from the mine since the existing Plan of Operations for the mine was approved by BLM in 1988. The Plaintiffs further claim that all required permits have not been obtained for the mine under the Clean Air Act, and that, as a result, BLM failed to take all actions necessary to prevent unnecessary degradation of the public lands. The Plaintiffs are seeking an order declaring that the Defendants have violated these environmental laws in relation to the Arizona 1 Mine, and an injunction directing operations to cease and stopping the Defendants from authorizing or allowing any further mining or exploration operations at the Arizona 1 mine until BLM complies with all applicable laws. On February 8, 2010 the Defendants filed an Answer to the Plaintiffs' complaint denying the foregoing allegations. On February 5, 2010, Denison filed a motion to be added as an intervener in this lawsuit. Denison believes that each of these allegations is without legal merit, is not supported by the administrative record, and should be dismissed. However, if the Plaintiffs are successful in their claims, the Company may be required to stop mining activities at the Arizona 1 mine pending resolution of this matter, which could have a significant adverse impact on the Company.
Other
Operating costs for the year include an expense of $3,712,000 (2008-$9,500,000) relating to the net realizable value of the Company's uranium and vanadium inventory. Operating costs also include expenses relating to DES division amounting to $11,432,000 in 2009 and $5,188,000 in 2008.
Sales Royalties and Capital Taxes
Sales royalties on Canadian production and capital taxes totaled $628,000 and $1,675,000 for the three months and year ended December 31, 2009 compared with $647,000 and $3,117,000 for the same periods in 2008. Denison pays a Saskatchewan basic uranium royalty of 4% of gross uranium sales after receiving the benefit of a 1% Saskatchewan resource credit. Denison also pays Saskatchewan capital taxes based on the greater of 3.0% of gross uranium sales or capital tax otherwise computed under the Corporation Capital Tax Act (Saskatchewan). The Government of Saskatchewan also imposes a tiered royalty which ranges from 6% to 15% of gross uranium sales after recovery of mill and mine capital allowances which approximate capital costs. It is likely that Denison will pay tiered royalties in 2010. The Government of Saskatchewan, in conjunction with the uranium industry in Saskatchewan, is reviewing the current tiered royalty structure with a view to altering it to better align it with current and future industry economics.
Mineral Property Exploration
Denison is engaged in uranium exploration, as both operator and non-operator of joint ventures and as operator of its own properties in Canada, the U.S., Mongolia and Zambia. For the three months ended December 31, 2009 exploration expenditures totaled $2,553,000, and $10,120,000 for the year ended December 31, 2009 as compared to $2,080,000 and $20,114,000 for the three months and year ended December 31, 2008.
A majority of the exploration expenditures during 2009 were spent in the Athabasca Basin region of northern Saskatchewan. Denison is engaged in uranium exploration as part of the ARC operated McClean and Midwest joint ventures, as well as on 29 other exploration projects including the Company's 60% owned Wheeler River project. Denison's share of exploration spending on its Canadian properties totaled $2,330,000 of which $2,297,000 was expensed in the statement of operations for the three months ended December 31, 2009 and totaled $8,330,000 of which $7,726,000 was expensed in the statement of operation for the year ended December 31, 2009. For the three months ended December 31, 2008, Canadian exploration spending totaled $733,000 of which $624,000 was expensed and totaled $12,943,000 of which $11,953,000 was expensed for the year ended December 31, 2008.
The results of the three 2009 drilling programs, on the Wheeler River property in the Athabasca Basin, have confirmed that the Phoenix discovery has the potential to host an economically significant, high-grade uranium deposit. In 2009 43 holes were drilled totalling 19,000 metres, with the drilling primarily focussed on the Phoenix discovery. The uranium mineralization extends over a one kilometre strike length and remains open in both directions at a depth of approximately 400 metres.
During the winter program, the first indications of high grade mineralization were identified in hole WR-258 which intersected 11.2% U3O8 over 5.5 metres. The summer drill program included the best intersection to date of 62.6% U3O8 over 6 metres in hole WR-273. The best intersections of the fall program were 32.8% eU3O8, 16.8% U3O8, 12.74% U3O8 and 8.02% U3O8 over 7.6, 9.0, 3.0 and 5.0 metres in holes WR-287, 286,291A and 290, respectively.
Exploration expenditures of $121,000 for the three months ended December 31, 2009 ($916,000 for the three months ended December 31, 2008) and of $2,054,000 for the year ended December 31, 2009 ($4,436,000 for the year ended December 31, 2008) were incurred in Mongolia on the Company's joint venture properties. The Company has a 70% interest in the Gurvan Saihan Joint Venture ("GSJV") in Mongolia. The other parties to the joint venture are the Mongolian government as to 15% and Geologorazvedka, a Russian government entity, as to 15%. At the Ulzit project, mineralization first discovered in 2008 was followed up on and further continuity of this mineralization was confirmed. A new zone of mineralization was discovered at the Choir Depression. Both of these areas of mineralization will require further drilling to confirm potential resources.
In Zambia, the environmental report was approved by the Government of Zambia and work continued on the mining licence and radioactive licence applications.
General and Administrative
General and administrative expenses totaled $3,085,000 for the three months ended December 31, 2009 compared with $3,349,000 for the three months ended December 31, 2008. For the year ended December 31, 2009, general and administrative expenses totaled $13,883,000 compared to $14,754,000 for the same period in 2008. General and administrative expenses consist primarily of payroll and related expenses for personnel, contract and professional services and other overhead expenditures.
Stoc
TORONTO, ONTARIO--(Marketwire - March 11, 2010) - Denison Mines Corp. ("Denison" or the "Company") (TSX:DML)(NYSE Amex:DNN) today reported its financial results for the three months and year ended December 31, 2009. All amounts in this release are in U.S. dollars unless otherwise indicated. For a more detailed discussion of the Company's financial results, see management's discussion and analysis ("MD&A"), a copy of which is attached to this release.
Financial Highlights
-- Revenue was $31.1 million for the three months and $79.2 million for the
year ended December 31, 2009.
-- Net loss was $36.1 million ($0.11 per share) for the three months and
$147.0 million ($0.51 per share) for the year ended December 31, 2009.
-- Denison recorded a non-cash impairment charge of $100.0 million against
its mineral property investment in Zambia in the third quarter. This
impairment charge resulted in a future tax recovery of $30.0 million.
-- Denison also recorded a non-cash impairment charge of $22.1 million
against its goodwill in the fourth quarter.
-- Cash flow from (used in) operations was $5.6 million for the three
months and ($42.4 million) for the year ended December 31, 2009.
-- In 2009 Denison paid down all of its bank debt, and at year end the
Company was debt-free and had a cash balance of $19.8 million and
working capital of $75.6 million.
Operating Highlights
-- Denison's 2009 production totaled 1,426,000 pounds U3O8 and totaled
501,000 pounds V2O5.
-- Uranium sales were 1,127,000 pounds U3O8 at an average price of $51.17
per pound.
-- Vanadium sales totaled 520,000 pounds V2O5 at an average price of $3.73
per pound and 229,000 pounds FeV at an average price of $11.09 per
pound.
-- At the end of 2009 the Company had 484,000 pounds U3O8 and 773,000
pounds V2O5 and 2,000 pounds FeV in inventory available for sale. Based
on current spot market prices, this inventory had a value of $24,582,000
million.
-- At the Wheeler River property in the Athabasca Basin region of northern
Saskatchewan, Denison announced one of the best new discoveries in this
uranium rich region in the last twenty years. Some of the best
intersections of the three 2009 drill programs included 62.6% U3O8 over
6.0 metres, 32.8% eU3O8 over 7.6 metres and 16.8% over 9.0 metres.
-- In Mongolia, the Gurvan Saihan Joint Venture's (70% owned by Denison)
resource report was formally accepted by the Mongolian government. This
is the first uranium resource accepted by the government and is the
first stage in the receipt of a mining licence.
-- In Zambia, the Mutanga project's Environmental Report, or Environmental
Impact Statement, was accepted by the Zambian government.
-- At the White Mesa mill, the Company worked through 2009 without a lost
time accident and surpassed the admirable milestone of 1.0 million hours
worked without a lost time accident.
Financial Summary
Three Months Ended Year Ended December
December 31 31
--------------------- ---------------------
2009 2008 2009 2008
Revenue ($000's) $ 31,052 $ 36,807 $ 79,170 $ 123,184
Net Income (Loss) ($000's) (36,127) (56,762) (147,012) (80,648)
Earnings (Loss) Per Share ($) (0.11) (0.30) (0.51) (0.42)
Cash Provided By (Used By)
Operations ($000's) 5,615 673 (42,442) (8,764)
Revenue
Uranium sales revenue for the fourth quarter was $24,800,000. Sales from U.S. production were 350,000 pounds U3O8 at an average price of $43.23 per pound. Sales of Canadian production were 198,000 pounds U3O8 at an average price of $45.75 per pound. Uranium sales revenue also includes amortization of the fair value increment related to the Denison Mines Inc. ("DMI") sales contracts totaling $622,000 for the quarter.
Uranium sales revenues for the year were $59,889,000. Sales from U.S. production were 635,000 pounds U3O8 at an average price of $53.04 per pound. Sales of Canadian production were 492,000 pounds U3O8 at an average price of $48.76 per pound. Amortization of the fair value increment totaled $2,313,000 for the year.
Uranium sales revenue in the fourth quarter of 2008 totaled $34,812,000. Sales from U.S. production were 400,000 pounds U3O8 at an average price of $61.50 per pound. Sales of Canadian production were 177,000 pounds U3O8 at an average price of $52.28 per pound. Amortization of the fair value increment related to long-term sales contracts from the acquisition of DMI totaled $859,000. Uranium sales revenues for the 2008 year were $114,588,000, with sales of U.S. production of 920,000 pounds U3O8 at an average price of $67.27 per pound, and sales of Canadian production were 743,000 pounds U3O8 at an average price of $57.40 per pound. Amortization of the fair value increment related to long-term sales contracts from the acquisition of DMI totaled $9,449,000.
During the three months ended December 31, 2009, the Company sold 11,000 pounds of vanadium blackflake ("V2O5") at an average price of $6.00 per pound and 142,000 pounds of ferrovanadium ("FeV") at an average price of $10.96 per pound. Total vanadium sales revenue was $1,617,000. During the year ended December 31, 2009, the Company sold 520,000 pounds V2O5 at an average price of $3.73 per pound and 229,000 pounds of FeV at an average price of $11.09 per pound. Total vanadium sales revenue was $4,480,000. No vanadium was sold in 2008.
Revenue from Denison's environmental services division was $3,985,000 for the three months ended December 31, 2009 compared to $1,633,000 in the comparable 2008 period and for the year were $12,226,000 compared to $5,562,000 for the year in 2008. The increase in revenue is due to the increased activity related to the Company's contract with the Yukon government for site maintenance and water treatment for the FARO mine site in Yukon which was signed in late 2008. Revenue from the management contract with Uranium Participation Corporation was $636,000 for the three months and $2,522,000 for the year ended December 31, 2009 compared to $318,000 and $2,929,000 in the same periods in 2008.
Operating Expenses
Canadian Operations
The McClean Lake Joint Venture produced 934,000 pounds U3O8 for the three months ended December 31, 2009 and 3,609,000 pounds U3O8 for the year ended December 31, 2009 compared with 682,000 pounds U3O8 for the three months ended December 31, 2008 and 3,248,000 pounds U3O8 for the year ended December 31, 2008. Denison's 22.5% share of production totaled 210,000 and 812,000 pounds respectively for the 2009 periods compared to 154,000 and 731,000 pounds for the corresponding 2008 periods.
Production costs were $50.47 per pound U3O8 for the quarter and $45.49 per pound for the year ending December 31, 2009. For comparable periods in 2008, the production costs were $57.99 and $55.29 per pound U3O8. Production costs, less amortization, depletion and depreciation for the quarter and the year ending December 31, 2009 were $19.99 per pound and $19.49 per pound, respectively. Comparative costs for the same periods in 2008 were $28.71 per pound and $23.19 per pound.
Inventory available for sale from Canadian production was 342,000 pounds U3O8 at December 31, 2009.
U.S. Operations
At the White Mesa mill, processing of alternate feed material began in early June using the newly constructed alternate feed circuit. Production from alternate feed material in the three months and year ended December 31, 2009 was 107,000 and 191,000 pounds U3O8, respectively. Processing of conventional ore ceased in May 2009, yielding a total of 423,000 pounds U3O8. Total production year to date from both alternate feed and conventional ore was 614,000 pounds U3O8. Processing of conventional ore at White Mesa is expected to resume in March, 2010. Production was 485,000 pounds U3O8 for the three months and 885,000 pounds U3O8 for the year ended December 31, 2008. The Company produced 501,000 and 1,223,000 pounds V2O5 for the years ended December 31, 2009 and 2008 respectively.
At December 31, 2009, a total of 174,000 tons of conventional ore was stockpiled at the mill containing approximately 706,000 pounds U3O8 and 3,600,000 pounds V2O5. The Company also has approximately 638,000 pounds U3O8 contained in the alternate feed material stockpiled at the mill at December 31, 2009.
Production costs for the three months ended December 31, 2009 were $52.06 per pound U3O8 equivalent. Deducting depletion, amortization and depreciation yields a production cost of $39.52 per pound. The production costs for the year ended December 31, 2009 were $70.26 per pound U3O8 equivalent. Deducting depletion, amortization and depreciation yields a production cost of $37.62.
Inventory available for sale from U.S. production was 142,000 pounds U3O8, 773,000 pounds V2O5, and 2,000 pounds FeV at December 31, 2009.
Other
Operating costs for the year ended December 31, 2009 include an expense of $3,712,000 (2008-$9,500,000) relating to the net realizable value of the Company's uranium and vanadium inventory. Operating expenses also include costs relating to Denison's environmental services division amounting to $3,886,000 in the three month period and $11,432,000 for the year ended December 31, 2009 and $1,373,000 and $5,188,000 in the comparable periods in 2008.
Impairment of Mineral Properties
During the third quarter, the Company determined that it should take an impairment charge against the carrying value of its mineral property investment in Zambia and has accordingly recorded a write-down of $100,000,000. The impairment recognizes a decline in the long-term uranium price outlook and refinements in the mine plan and project cost estimates. The impairment charge was determined based on comparisons of current market values of similar properties. The Company also recorded a future income tax recovery of $30,000,000 as a result of the impairment charge. The Company continues to work towards a production decision for the project.
Impairment of Goodwill
Denison evaluates the carrying amount of goodwill annually to determine whether events or changes in circumstances indicate whether such carrying amount has become impaired. Denison's goodwill amount arises from the acquisition of DMI in 2006. The goodwill was allocated to the Canadian mining segment. Denison examined the fair value of the assets and liabilities of the segment at December 31, 2009. The determination of fair market value was based on discounted cash flow analysis for production assets using consensus expectations for future uranium prices and foreign exchange, future costs and a discount rate of 10.5%. Exploration properties were valued at estimated market value at December 31, 2009. Based on this analysis, the Company determined the fair values have decreased and, as a result, determined that an impairment charge of $22,136,000 should be made and charged to operations in the fourth quarter.
Mineral Property Exploration
Denison is engaged in uranium exploration, as both operator and non-operator of joint ventures and as operator of its own properties in Canada, the U.S., Mongolia and Zambia. For the three months ended December 31, 2009 exploration expenditures totaled $2,553,000, and totaled $10,120,000 for the year ended December 31, 2009 as compared to $2,080,000 and $20,114,000 for the three months and year ended December 31, 2008.
A majority of the exploration expenditures during 2009 were spent in the Athabasca Basin region of northern Saskatchewan. Denison is engaged in uranium exploration as part of the ARC operated McClean and Midwest joint ventures, as well as on 29 other exploration projects including the Company's 60% owned Wheeler River project. Denison's share of exploration spending on its Canadian properties totaled $2,330,000 of which $2,297,000 was expensed in the statement of operations for the three months ended December 31, 2009 and totaled $8,330,000 of which $7,726,000 was expensed in the statement of operation for the year ended December 31, 2009. For the three months ended December 31, 2008, Canadian exploration spending totaled $733,000 of which $624,000 was expensed and totaled $12,943,000 of which $11,953,000 was expensed for the year ended December 31, 2008.
The results of the three 2009 drilling programs, on the Wheeler River property in the Athabasca Basin, have confirmed that the Phoenix discovery has the potential to host an economically significant, high-grade uranium deposit. In 2009 43 holes were drilled totalling 19,000 metres, with the drilling primarily focussed on the Phoenix discovery. The uranium mineralization extends over a one kilometre strike length and remains open in both directions at a depth of approximately 400 metres.
During the winter program, the first indications of high grade mineralization were identified in hole WR-258 which intersected 11.2% U3O8 over 5.5 metres. The summer drill program included the best intersection to date of 62.6% U3O8 over 6 metres in hole WR-273. The best intersections of the fall program were 32.8% eU3O8, 16.8% U3O8, 12.74% U3O8 and 8.02% U3O8 over 7.6, 9.0, 3.0 and 5.0 metres in holes WR-287, 286, 291A and 290, respectively.
Exploration expenditures of $121,000 for the three months ended December 31, 2009 ($916,000 for the three months ended December 31, 2008) and of $2,054,000 for the year ended December 31, 2009 ($4,436,000 for the year ended December 31, 2008) were incurred in Mongolia on the Company's joint venture properties. The Company has a 70% interest in the Gurvan Saihan Joint Venture ("GSJV") in Mongolia. The other parties to the joint venture are the Mongolian government as to 15% and Geologorazvedka, a Russian government entity, as to 15%. At the Ulzit project, mineralization first discovered in 2008 was followed up on and further continuity of this mineralization was confirmed. A new zone of mineralization was discovered at the Choir Depression. Both of these areas of mineralization will require further drilling to confirm potential resources.
In Zambia, the environmental report was approved by the Government of Zambia and work continued on the mining licence and radioactive licence applications.
Liquidity
The Company had cash and cash equivalents of $19,804,000 at December 31, 2009, trade and other receivables of $13,773,000 and portfolio investments with a market value of $10,605,000. The Company has in place a revolving credit facility of $60,000,000 which will be used primarily for working capital purposes. The term of the facility is to June 30, 2011. Bank indebtedness under the facility at December 31, 2009 was nil; however, $9,228,000 of the line is used as collateral for certain letters of credit.
Outlook for 2010
Mining and Production
-- 2010 uranium production is expected to total 1.6 million pounds U3O8 and
vanadium production is estimated to total 2.8 million pounds V2O5.
-- Uranium and vanadium sales are expected to be approximately 1.8 million
pounds U3O8 and 3.4 million pounds V2O5 in 2010. The Company expects to
achieve an average realized uranium price of $54.34 per pound, based on
an assumed long term price of $64.00 per pound and a spot price of
$49.00 per pound U3O8. Vanadium revenue is expected to be $19.3 million
based on an assumed price of $5.75 per pound V2O5.
-- Cash cost of production is expected to average $35.15 per pound U3O8,
net of vanadium credits. This compares to $44.27 in 2009 calculated on
the same basis.
-- Capital expenditures for 2010 at the Company's operations are estimated
at $17.5 million of which $3.6 million is for mine development and the
remainder for tailings cell construction at White Mesa and other plant
and equipment.
-- In 2010 Denison will participate in exploration programs on properties
in Canada and the United States. The total budget for these programs is
estimated at $11.5 million, of which Denison's share will be
approximately $6.3 million.
-- On the Wheeler River property a 45 hole 22,500 metre drilling program
has begun which will continue to evaluate the new Phoenix discovery.
-- On development stage projects a total of $8.8 million will be spent in
2010 of which $6.5 million will be incurred to advance the Zambian and
Mongolian projects. The remainder will be spent on Denison's U.S. and
ARC operated Canadian projects.
-- Denison's business development activities, including exploration,
project development and acquisitions are part of its five year strategic
plan to increase the Company's sustainable uranium production to 10
million pounds U3O8 per year by 2020, at the latest.
Denison has used a U3O8 spot price of $49.00 per pound and a long-term price of $64.00 per pound, a V2O5 price of $5.75 per pound and a foreign exchange rate of US$1.00 equals CDN$1.075 in developing this outlook.
For each $5.00 per pound change in the U3O8 spot price, the revenue changes by $4.8 million and a $4.00 change in the long-term price changes revenue by $2.3 million. A $1.00 per pound change in the vanadium price results in a $3.4 million change in revenue. A $0.01 change in the foreign exchange rate changes cash flow by $0.2 million.
Conference Call
Denison is hosting a conference call on Friday, March 12, 2010 starting at 10:00 A.M. (Toronto time) to discuss the 2009 results. The webcast will be available live through a link on Denison's website www.denisonmines.com and by telephone at 416-340-8061. A recorded version of the conference call will be available by calling 416-695-5800 (password: 4234716) approximately two hours after the conclusion of the call. The presentation will also be available at www.denisonmines.com.
Additional Information
Additional information on Denison is available on SEDAR at www.sedar.com and on the Company's website at www.denisonmines.com.
About Denison
Denison Mines Corp. is an intermediate uranium producer in North America, with mining assets in the Athabasca Basin region of Saskatchewan, Canada and the southwest United States including Colorado, Utah, and Arizona. Further, the Company has ownership interests in two of the four conventional uranium mills operating in North America today. Denison also has a strong exploration and development portfolio with large land positions in the United States, Canada, Mongolia and Zambia.
Cautionary Statements
Certain information contained in this press release constitutes "forward-looking information", within the meaning of the United States Private Securities Litigation Reform Act of 1995 and similar Canadian legislation concerning the business, operations and financial performance and condition of Denison.
Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved".
Forward looking statements are based on the opinions and estimates of management as of the date such statements are made, and they are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Denison to be materially different from those expressed or implied by such forward-looking statements. Denison believes that the expectations reflected in this forward-looking information are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking information included in this press release should not be unduly relied upon. This information speaks only as of the date of this press release. In particular, this press release may contain forward-looking information pertaining to the following: the estimates of Denison's mineral reserves and mineral resources; uranium and vanadium production levels; capital expenditure programs, estimated production costs, exploration expenditures and reclamation costs; expectations of market prices and costs; supply and demand for uranium and vanadium; possible impacts of litigation on Denison; exploration, development and expansion plans and objectives; Denison's expectations regarding raising capital and adding to its mineral reserves through acquisitions and development; and receipt of regulatory approvals and permits and treatment under governmental regulatory regimes.
There can be no assurance that such statements will prove to be accurate, as Denison's actual results and future events could differ materially from those anticipated in this forward-looking information as a result of those factors discussed in or referred to under the heading "Risk Factors" in Denison's MD&A dated march 11, 2010, its Annual Information Form dated March 26, 2009, its Short Form Prospectus dated June 15, 2009, all of which are available at http://www.sedar.com, and in its Form 40-F available at http://www.sec.gov, as well as the following: global financial conditions, the market price of Denison's securities, volatility in market prices for uranium and vanadium; ability to access capital, changes in foreign currency exchange rates and interest rates; liabilities inherent in mining operations; uncertainties associated with estimating mineral reserves and resources; failure to obtain industry partner and other third party consents and approvals, when required; delays in obtaining permits and licences for development properties; competition for, among other things, capital, acquisitions of mineral reserves, undeveloped lands and skilled personnel; incorrect assessments of the value of acquisitions; and geological, technical and processing problems, the ability of Denison to meet its obligations to its creditors, the potential influence of or reliance upon a business partner, and the adequacy of insurance coverage
Accordingly, readers should not place undue reliance on forward-looking statements. These factors are not, and should not be construed as being, exhaustive. Statements relating to "mineral reserves" or "mineral resources" are deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions that the mineral reserves and mineral resources described can be profitably produced in the future. The forward-looking information contained in this press release is expressly qualified by this cautionary statement. Denison does not undertake any obligation to publicly update or revise any forward-looking information after the date of this press release to conform such information to actual results or to changes in Denison's expectations except as otherwise required by applicable legislation.
Cautionary Note to United States Investors Concerning Estimates of Measured, Indicated and Inferred Resources: This news release may use the terms "Measured", "Indicated" and "Inferred" Resources. United States investors are advised that while such terms are recognized and required by Canadian regulations, the United States Securities and Exchange Commission does not recognize them. "Inferred Mineral Resources" have a great amount of uncertainty as to their existence, and as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or other economic studies. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.
Qualified Person
The disclosure of scientific and technical information regarding Denison's properties in the MD&A was prepared by or under the supervision of William C. Kerr, the Company's Vice-President, Exploration, who is a Qualified Person in accordance with the requirements of National Instrument 43-101.
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DENISON MINES CORP.
Management's Discussion and Analysis
Year Ended December 31, 2009
(Expressed in U.S. Dollars, Unless Otherwise Noted)
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INTRODUCTION
This Management's Discussion and Analysis ("MD&A") of Denison Mines Corp. and its subsidiary companies and joint ventures (collectively, "Denison" or the "Company") provides a detailed analysis of the Company's business and compares its financial results with those of the previous year. This MD&A is dated as of March 11, 2010 and should be read in conjunction with, and is qualified by, the Company's audited consolidated financial statements and related notes for the year ended December 31, 2009. The financial statements are prepared in accordance with generally accepted accounting principles in Canada with a discussion in Note 26 of the material differences between Canadian and United States generally accepted accounting principles and practices affecting the Company. All dollar amounts are expressed in U.S. dollars, unless otherwise noted.
Other continuous disclosure documents, including the Company's press releases, quarterly and annual reports, Annual Information Form and Form 40-F are available through its filings with the securities regulatory authorities in Canada at www.sedar.com and the United States at www.sec.gov/edgar.shtml
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information contained in this MD&A constitutes "forward-looking information", within the meaning of the United States Private Securities Litigation Reform Act of 1995 and similar Canadian legislation concerning the business, operations and financial performance and condition of Denison.
Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved".
Forward looking statements are based on the opinions and estimates of management as of the date such statements are made, and they are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Denison to be materially different from those expressed or implied by such forward-looking statements. Denison believes that the expectations reflected in this forward-looking information are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking information included in this MD&A should not be unduly relied upon. This information speaks only as of the date of this MD&A. In particular, this MD&A may contain forward-looking information pertaining to the following: the estimates of Denison's mineral reserves and mineral resources; uranium and vanadium production levels; capital expenditure programs, estimated production costs, exploration expenditures and reclamation costs; expectations of market prices and costs; supply and demand for uranium and vanadium; possible impacts of litigation on Denison; exploration, development and expansion plans and objectives; Denison's expectations regarding raising capital and adding to its mineral reserves through acquisitions and development; and receipt of regulatory approvals and permits and treatment under governmental regulatory regimes.
There can be no assurance that such statements will prove to be accurate, as Denison's actual results and future events could differ materially from those anticipated in this forward-looking information as a result of those factors discussed in or referred to under the heading "Risk Factors" in Denison's Annual Information Form dated March 26, 2009, the Short Form Prospectus dated June 15, 2009, available at http://www.sedar.com and its Form 40-F available at http://www.sec.gov, as well as the following: volatility in market prices for uranium and vanadium; changes in foreign currency exchange rates and interest rates; liabilities inherent in mining operations; uncertainties associated with estimating mineral reserves and resources; failure to obtain industry partner and other third party consents and approvals, when required; delays in obtaining permits and licences for development properties; competition for, among other things, capital, acquisitions of mineral reserves, undeveloped lands and skilled personnel; incorrect assessments of the value of acquisitions; and geological, technical and processing problems.
Accordingly, readers should not place undue reliance on forward-looking statements. These factors are not, and should not be construed as being, exhaustive. Statements relating to "mineral reserves" or "mineral resources" are deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions that the mineral reserves and mineral resources described can be profitably produced in the future. The forward-looking information contained in this MD&A is expressly qualified by this cautionary statement. Denison does not undertake any obligation to publicly update or revise any forward-looking information after the date of this MD&A to conform such information to actual results or to changes in Denison's expectations except as otherwise required by applicable legislation.
Cautionary Note to United States Investors Concerning Estimates of Measured, Indicated and Inferred Resources: "This MD&A" may use the terms "Measured", "Indicated" and "Inferred" Resources. United States investors are advised that while such terms are recognized and required by Canadian regulations, the United States Securities and Exchange Commission does not recognize them. "Inferred Mineral Resources" have a great amount of uncertainty as to their existence, and as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or other economic studies. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.
2009 HIGHLIGHTS
-- Denison's 2009 production totaled 1,426,000 million pounds U3O8 and
501,000 pounds V2O5.
-- Uranium sales were 1,127,000 million pounds U3O8 at an average price of
$51.17 per pound.
-- Vanadium sales totaled 520,000 pounds V2O5 at an average price of $3.73
per pound and 229,000 pounds FeV at an average price of $11.09 per
pound.
-- At the end of 2009 the Company had 484,000 pounds U3O8 and 773,000
pounds V2O5 and 2,000 pounds FeV in inventory available for sale. Based
on current spot market prices, this inventory has a value of $24,582,000
million.
-- In 2009 Denison paid down all of its debt and at year end is debt-free
and has a cash balance of $19.8 million and working capital of $75.6
million.
-- At the Wheeler River property in the Athabasca Basin region of northern
Saskatchewan, Denison announced one of the best new discoveries in this
uranium rich region in the last twenty years. Some of the best
intersections of the three 2009 drill programs included 62.6% U3O8 over
6.0 metres, 32.8% eU3O8 over 7.6 metres and 16.8% over 9.0 metres.
-- In Mongolia, the Gurvan Saihan Joint Venture's (70% owned by Denison)
resource report was formally accepted by the Mongolian government. This
is the first uranium resource accepted by the government and is the
first stage in the receipt of a mining licence.
-- In Zambia, the Mutanga project's Environmental Report, or Environmental
Impact Statement, was accepted by the Zambian government.
-- At the White Mesa mill the Company worked through 2009 without a lost
time accident and surpassed the admirable milestone of 1.0 million hours
worked without a lost time accident.
ABOUT DENISON
Denison was formed by articles of amalgamation effective May 9, 1997 pursuant to the Business Corporations Act (Ontario) (the "OBCA") and by articles of arrangement effective December 1, 1006. Denison is a reporting issuer in all of the Canadian provinces. Denison's common shares are listed on the Toronto Stock Exchange (the "TSX") under the symbol "DML" and on the NYSE Amex LLC ("Amex") under the symbol "DNN".
Denison is a diversified, intermediate uranium producer with uranium production in both the U.S. and Canada and development projects in the U.S., Canada, Zambia and Mongolia. Denison's assets include an interest in 2 of the 4 licensed and conventional uranium mills currently operating in North America, with its 100% ownership of the White Mesa mill in Utah and its 22.5% ownership of the McClean Lake mill in Saskatchewan. The Company also produces vanadium as a co-product from some of its mines in Colorado and Utah. The Company is also in the business of processing uranium-bearing waste materials, referred to as "alternate feed materials", for the recovery of uranium, alone or in combination with other metals, at the Company's White Mesa mill.
Denison owns interests in a portfolio of exploration projects, including the Wheeler River property along with other properties in close proximity to the Company's mills in the Athabasca Basin in Saskatchewan and in the Colorado Plateau, Henry Mountains and Arizona Strip regions of the southwestern United States.
Denison is the manager of Uranium Participation Corporation ("UPC"), a publicly traded company which invests in uranium oxide in concentrates and uranium hexafluoride. Denison is also engaged in mine decommissioning and environmental services through its Denison Environmental Services ("DES") division.
Strategy
Denison intends to position the Company as an important global uranium producer with annual uranium production of not less than 10 million pounds by 2020 at the latest. This will take place through production from Denison's currently operating mines and through its ongoing business development activities, including exploration and development of existing projects. Denison will also look to diversify its production geographically and evaluate opportunities to make in-situ uranium recovery a larger component of its production.
The Uranium Industry
Nuclear power capacity and power generation is growing significantly, while uranium production is struggling to catch up after many years of low prices and limited exploration for new deposits required to support the growth of nuclear power and to replace depleting ore bodies. As a result, there is a tight long-term supply-demand balance which can be expected to continue for the foreseeable future. Prices must rise to higher, sustained levels to support the new mines required to meet the increasing demand.
Uranium Demand
There are currently 436 nuclear reactors operating worldwide in 30 countries, generating 372.6 gigawatts of electricity and supplying 15% of the world's electrical requirements. Of greater significance, 53 nuclear reactors are under construction in 13 countries with the principal drivers of this expansion being China, India, South Korea and Russia which have a total of 40 reactors under construction. China, in particular, has a very aggressive new build program underway. By 2020, it is estimated that there will be 570 nuclear reactors in operation worldwide, supplying 518.5 gigawatts. This would represent an increase of over 30% in only 10 years, with 11 new countries joining the nuclear family.
Nuclear reactors are very capital intensive; therefore economics dictate that they need to be operated to the maximum as base-load power. As a consequence, demand for uranium is nearly non-elastic. Ux Consulting ("UxCo") has estimated in its "Uranium Market Outlook - Q1 2010", that uranium demand will grow from 185 million pounds of U3O8 in 2009 to 247.3 million pounds in 2020.
While long-term demand is steadily growing, short-term demand is affected in a large part by utilities' uncovered requirements. Utilities normally purchase the majority of their fuel requirements under long-term contracts. To the extent that they have uncovered demand in the near term, they will purchase on the spot market which in turn affects the spot price. Currently, there is relatively low uncovered demand so utility buying is purely discretional and price driven.
Primary Uranium Supply
Uranium supply is the biggest variable in the supply-demand equation. During the time that the accumulated inventories from over production in the 1970s were being drawn down, primary mine production accounted for only approximately 50% of demand. A number of new mines have been brought into production over the last few years while others are in various stages of development. However, production still only accounts for approximately 70% of demand and many more are required to meet the increasing future demand and to replace mines that are being depleted.
UxCo has estimated in its "Uranium Market Outlook - Q1 2010" that existing mine production plus new planned and potential mine production will increase primary uranium supply from 131.8 million pounds in 2009 to 210.4 million pounds in 2020, falling short of expected demand of 247.3 million pounds per year. The principal driver for the increase in primary mine production is expected to be Kazakhstan, which is projected to nearly triple production between 2008 and 2020. However prices will need to increase appreciably to support the additional higher cost production required to meet these production forecasts.
Secondary Uranium Supply
Primary mine production currently supplies less than 70% of demand. The balance of demand is supplied from secondary sources such as remaining excess commercial inventories, reprocessing of spent fuel, inventories held by governments and the downblending of highly-enriched uranium ("HEU") from nuclear weapons programs. By far, the most significant of the secondary supplies currently is the 18 to 24 million pounds per year being provided from the HEU downblending program. The HEU program is scheduled to terminate in 2013. The supply gap created by this termination will need to be made up from new primary mine production.
Excess commercial inventories, which were once one of the major sources of secondary supplies during the period from the early 1970s to the early 2000s, have largely been consumed. The disposition of government inventories held by the United States and Russia will have a market impact over the next 10 to 20 years; however, the rate and timing of this material entering the market is uncertain.
Reprocessing of spent fuel is another source of secondary supply but is expected to satisfy only 3 to 4% of demand. Expansion of this secondary source would require major investments in facilities which could only be supported by a significant increase in long-term prices.
UxCo expects that secondary sources of supply will fall from 52 million pounds to 19 million pounds per year from now to 2020.
Uranium Prices
Most of the countries that use nuclear-generated electricity do not have a sufficient domestic uranium supply to fuel their nuclear power reactors, and their electric utilities must secure their required uranium supply by entering into medium-term and long-term contracts with foreign uranium producers and other suppliers. These contracts usually provide for deliveries to begin two to four years after they are signed and provide for four to eight delivery years. In awarding medium-term and long-term contracts, electric utilities consider, in addition to the commercial terms offered, the producer's uranium reserves, record of performance and costs, all of which are important to the producer's or supplier's ability to fulfill long-term supply commitments. Prices are established by a number of methods, including base prices adjusted by inflation indices, reference prices (generally spot price indicators, but also long-term reference prices) and annual price negotiations. Contracts may also contain floor prices, ceiling prices and other negotiated provisions which affect the amount paid by the buyer to the seller. Under these contracts, the actual price mechanisms are usually confidential. Electric utilities procure their remaining requirements through spot and near-term purchases from uranium producers and other suppliers, including other utilities holding excess inventory and governments.
The long-term price rose from just under $11.00 per pound at the end of 2002 to a peak of $95.00 in May 2007 and remained at that level until mid-2008. Since then, it has steadily declined to $62.00 at the end of 2009. Long-term prices are driven more by production costs and the future supply-demand balance than by customer inventories. This is one of the reasons why a gap between long-term prices and spot prices exist.
Spot prices rose rapidly from a low of $7.10 per pound U3O8 in December 2000 to a peak of $136.00 per pound U3O8 in mid 2007 before declining and ending 2007 at $95.00 per pound U3O8. Spot prices in 2008 and 2009 have been very volatile but have generally continued to decline. The low price for 2009 was $40.00, reached in early April. Prices generally fluctuated during 2009, from the low $40s to the low $50s and ended the year at $44.50 per pound U3O8.
Competition
Uranium production is international in scope and is characterized by a relatively small number of companies operating in only a few countries. The top ten producers accounted for over 90% of the world's primary mine supply in 2009.
Nearly 70% of the world's production came from four countries, namely - Kazakhstan, Canada, Australia and Namibia. Kazakhstan passed Canada in 2009 as the largest producer.
Marketing Uranium
The sale of the majority of Denison's uranium is under long-term contracts. These long-term contracts have a variety of pricing mechanisms, including fixed prices, base prices adjusted by inflation indicies and/or spot price or long-term contract reference prices. Time of delivery during a year under long-term contracts is at the discretion of the customer, so the Company's delivery obligations may vary markedly from quarter to quarter.
In 2009, approximately 60% of the total sales volume was sold under long term contracts, with the remainder in the spot market. The Company currently has five long-term contracts in place. One is for the sale of the lesser of 50% of White Mesa mill production or 750,000 pounds in 2010 and 1,000,000 pounds in 2011, and then 32% of the production until a total of 2.5 million pounds have been delivered and then 17% of production until a total of 6.5 million pounds have been delivered. The sales price is 95% of the published long-term price for the month prior to delivery with a floor price of $45.00. This contract is for a total of 6.5 million pounds, of which by the end of 2009, 535,000 pounds have been delivered. The second contract is for 20% of the Company's annual production from any production source (+/-10%) but not less than 350,000 pounds (+/-10%) per year from 2010 to 2015 inclusive. The purchase price per pound is based on industry standard terms. This agreement also provides for the purchase of 20% of production after 2015 subject to certain conditions. The third contract is for delivery of 1,000,000 pounds of U3O8 from U.S. or Canadian production over a period of five years beginning in 2011. The price under the contract is a combination of an escalated base price and published market price indicators at the time of delivery subject to escalated floors and ceilings. The fourth contract is for 20% of production from the White Mesa mill during the years 2012 to 2017 inclusive, but not less than 200,000 pounds per year. The price per pound under this contract is 95% of the long-term price at the time of delivery with an escalated floor price. Finally, Denison has one joint contract with ARC under which Denison will deliver 49,000 pounds from its Canadian production in 2010. This contract is priced based on the average quoted spot price over the quarter prior to delivery.
Denison will continue to seek long-term contracts at prices sufficient to support the development of its mineral assets.
The Vanadium Market
Steelmaking accounts for 93% of world vanadium consumption, and world steel production dropped from 1.5 billion metric tons in 2008 to under one billion metric tons in 2009. The chemical and titanium alloy industries normally consume 4% and 3% of supply, respectively, and reduced vanadium requirements in these sectors also occurred during this timeframe.
Approximately 20% of vanadium in the world is produced from primary ore from sources in China, Russia and South Africa. The remaining 80% is produced from secondary production, or processing of steelmaking slag, oil and coal residues, spent catalysts and uranium co-products. The only uranium co-product producer of vanadium in the world at this time is Denison.
Due to falling market prices and the high cost of production from primary ore, many of these facilities have shut down. The largest secondary producers from steelmaking slag are in Russia and South Africa, and output was either cut back or halted during the year. In spite of these cutbacks, producers' inventories increased due to the drop in demand, and market prices fell. It is unclear whether the more expensive primary ore production that was idled will restart, or will be permanently shut down. If the latter is the case, it will strengthen the position of suppliers such as Denison.
At present, China is the largest steel producer in the world, but has lagged behind the other leading steel producing nations in the inclusion of vanadium as a micro alloy. Several industry analysts anticipate that the construction of new infrastructure in China, India and Russia will create increased demand for vanadium, especially in commercial building construction, roads and bridges, and power generation plants and transmission systems throughout those nations. Were China to increase its vanadium consumption to match the average seen throughout the western world, vanadium requirements could potentially increase by approximately 116 million pounds vanadium blackflake ("V2O5") per year, from current requirements of about 250 million pounds V2O5 per year.
The Company expects that the lower level of prices seen for the past year and a half should begin to strengthen slowly throughout 2010 as buyers begin to restock their diminished inventories, provided economic recovery gradually improves and steel production begins to increase in the U.S., Europe and the Far East.
Vanadium Marketing
All of Denison's vanadium sales during 2009 have been spot market sales, primarily to industry trading and brokerage companies. During 2009, Denison worked to increase the market awareness and exposure of the Company throughout the world, and has had considerable success.
Denison also concluded sales of V2O5 for product analysis and qualification with companies involved in titanium alloys in the aircraft engine and airframe industry. As businesses become familiar with the Company's product and satisfy themselves that it is compatible with their processes, Denison expects to enter into long-term sales agreements.
SELECTED ANNUAL FINANCIAL INFORMATION
The following selected financial information was obtained directly from or calculated using the Company's consolidated financial statements for the years ended December 31, 2009, December 31, 2008 and December 31, 2007.
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Three
Months Year ended Year ended Year ended
ended Dec. Dec. 31, Dec. 31 Dec. 31
(in thousands) 31, 2009 2009 2008 2007
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Results of Operations:
Total revenues $ 31,052 $ 79,170 $ 123,184 $ 76,764
Net income (loss) (36,127) (147,012) (80,648) 47,244
Basic earnings (loss) per
share (0.11) (0.51) (0.42) 0.25
Diluted earnings (loss) per
share (0.11) (0.51) (0.42) 0.24
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As at As at As at
Dec. 31, Dec. 31, Dec. 31,
2009 2008 2007
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Financial Position:
Working capital $ 75,578 $ 34,655 $ 75,915
Long-term investments 10,605 10,691 20,507
Property, plant and
equipment 691,039 717,433 727,823
Total assets 867,981 885,702 1,001,581
Total long-term liabilities $ 127,931 $ 249,716 175,081
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RESULTS OF OPERATIONS
General
The Company recorded a net loss of $147,012,000 ($0.51 per share) for 2009 compared with net loss of $80,648,000 ($0.42 per share) for 2008.
Revenues
Uranium sales revenue for the fourth quarter was $24,800,000. Sales from U.S. production were 350,000 pounds U3O8 at an average price of $43.23 per pound. Sales of Canadian production were 198,000 pounds U3O8 at an average price of $45.75 per pound. Uranium sales revenue also includes amortization of the fair value increment related to the Denison Mines Inc. ("DMI") sales contracts totaling $622,000 for the quarter.
Uranium sales revenues for the year were $59,889,000. Sales from U.S. production were 635,000 pounds U3O8 at an average price of $53.04 per pound. Sales of Canadian production were 492,000 pounds U3O8 at an average price of $48.76 per pound. Amortization of the fair value increment totaled $2,313,000 for the year.
Uranium sales revenue in the fourth quarter of 2008 totaled $34,812,000. Sales from U.S. production were 400,000 pounds U3O8 at an average price of $61.50 per pound. Sales of Canadian production were 177,000 pounds U3O8 at an average price of $52.28 per pound. Amortization of the fair value increment related to long-term sales contracts from the acquisition of DMI totaled $859,000. Uranium sales revenues for the 2008 year were $114,588,000, with sales of U.S. production of 920,000 pounds U3O8 at an average price of $67.27 per pound, and sales of Canadian production were 743,000 pounds U3O8 at an average price of $57.40 per pound. Amortization of the fair value increment related to long-term sales contracts from the acquisition of DMI totaled $9,449,000.
During the three months ended December 31, 2009, the Company sold 11,000 pounds of V2O5 at an average price of $6.00 per pound and 142,000 pounds of ferrovanadium ("FeV") at an average price of $10.96 per pound. Total vanadium sales revenue was $1,617,000. During the year ended December 31, 2009, the Company sold 520,000 pounds V2O5 at an average price of $3.73 per pound and 229,000 pounds of FeV at an average price of $11.09 per pound. Total vanadium sales revenue was $4,480,000. No vanadium was sold in 2008.
Revenue from the environmental services division was $12,226,000 compared to $5,562,000 in 2008. The increase in revenue is related to the Company's contract with the Yukon government for site maintenance and water treatment services for the Faro mine site in Yukon which was signed in late 2008. Revenue from the management contract with UPC was $2,522,000 compared to $2,929,000 in 2008.
Operating Expenses
Milling and Mining Expenses
The McClean Lake joint venture produced 934,000 pounds U3O8 for the three months ended December 31, 2009 and 3,609,000 pounds U3O8 for the year ended December 31, 2009 compared with 682,000 pounds U3O8 for the three months and 3,248,000 pounds U3O8 for the year ended December 31, 2008. Denison's 22.5% share of production totaled 210,000 pounds and 812,000 pounds respectively for the 2009 periods and 154,000 pounds and 731,000 pounds respectively for the 2008 periods.
Canadian production costs for the fourth quarter were $50.47 (CDN$53.35) per pound U3O8 including $30.48 (CDN$32.22) per pound U3O8 for amortization, depletion and depreciation costs compared to $57.99 (CDN$70.26) per pound U3O8 including $29.28 (CDN$35.47) per pound U3O8 for amortization, depletion and depreciation costs for the fourth quarter of 2008. For the year ended December 31, 2009, production costs were $45.49 (CDN$51.94) per pound U3O8 including $26.00 (CDN$29.69) per pound U3O8 for amortization, depletion and depreciation costs compared to $55.29 (CDN$58.94) per pound U3O8 including $32.10 (CDN$34.22) per pound U3O8 for amortization, depletion and depreciation costs for the year ended December 31, 2008.
Inventory from Canadian production was 342,000 pounds U3O8 at December 31, 2009.
On June 30, 2009, the Canadian Nuclear Safety Commission ("CNSC") renewed the operating licence for the McClean Lake operation for a period of eight years until June 30, 2017. The Athabasca Regional Government (the "ARG"), which is comprised of three First Nations and four provincial communities from the Athabasca Basin, launched a judicial review of CNSC's decision to grant the McClean Lake operating licence. The ARG is challenging the legality of the licence renewal on the basis of issues related to the Federal and Provincial governments' duty to consult with Aboriginal people. The operations should not be affected by the legal proceedings. An adverse decision by the court could have a significant adverse impact on the Company.
At the White Mesa mill, processing of alternate feed material began in early June using the newly constructed alternate feed circuit. Production from alternate feed material in the three months and year ended December 31, 2009 was 107,000 and 191,000 pounds U3O8, respectively. Processing of conventional ore ceased in May 2009, yielding a total of 423,000 pounds U3O8. Total production year to date from both alternate feed and conventional ore was 614,000 pounds U3O8. Processing of conventional ore at White Mesa is expected to resume in March of 2010. Production was 485,000 pounds U3O8 for the three months and 885,000 pounds U3O8 for the year ended December 31, 2008. The Company produced 501,000 and 1,223,000 pounds V2O5 for the years ended December 31, 2009 and 2008 respectively.
At December 31, 2009, a total of 174,000 tons of conventional ore was stockpiled at the mill containing approximately 706,000 pounds U3O8 and 3,600,000 pounds V2O5. The Company also has approximately 638,000 pounds U3O8 contained in the alternate feed material stockpiled at the mill at December 31, 2009.
Production costs for the three months ended December 31, 2009, including mill fixed and conventional ore stand-by costs were $52.06 per pound U3O8 equivalent. Deducting depletion, amortization and depreciation yields a production cost of $39.52 per pound. The production costs for the year ended December 31, 2009 were $70.26 per pound U3O8 equivalent. Deducting depletion, amortization and depreciation yields a production cost of $37.62.
Inventory available for sale from U.S. production was 142,000 pounds U3O8 and 773,000 pounds V2O5 and 2,000 pounds FeV at December 31, 2009.
On November 16, 2009, as amended on February 1, 2010, the Center for Biological Diversity, Grand Canyon Trust, Sierra Club and Kaibab Band of Paiute Indians ("the Plaintiffs") filed a lawsuit against the U.S. Secretary of the Interior and the U.S. Bureau of Land Management ("BLM") (together, the "Defendants") seeking an order declaring that the Defendants have violated environmental laws in relation to the Company's Arizona 1 mine, by not requiring a new Plan of Operations in connection with the start of mining activities. The Plaintiffs are also claiming that, if a new Plan of Operations is not required, the Defendants failed to conduct a review of potential environmental impacts from the mine since the existing Plan of Operations for the mine was approved by BLM in 1988. The Plaintiffs further claim that all required permits have not been obtained for the mine under the Clean Air Act, and that, as a result, BLM failed to take all actions necessary to prevent unnecessary degradation of the public lands. The Plaintiffs are seeking an order declaring that the Defendants have violated these environmental laws in relation to the Arizona 1 Mine, and an injunction directing operations to cease and stopping the Defendants from authorizing or allowing any further mining or exploration operations at the Arizona 1 mine until BLM complies with all applicable laws. On February 8, 2010 the Defendants filed an Answer to the Plaintiffs' complaint denying the foregoing allegations. On February 5, 2010, Denison filed a motion to be added as an intervener in this lawsuit. Denison believes that each of these allegations is without legal merit, is not supported by the administrative record, and should be dismissed. However, if the Plaintiffs are successful in their claims, the Company may be required to stop mining activities at the Arizona 1 mine pending resolution of this matter, which could have a significant adverse impact on the Company.
Other
Operating costs for the year include an expense of $3,712,000 (2008-$9,500,000) relating to the net realizable value of the Company's uranium and vanadium inventory. Operating costs also include expenses relating to DES division amounting to $11,432,000 in 2009 and $5,188,000 in 2008.
Sales Royalties and Capital Taxes
Sales royalties on Canadian production and capital taxes totaled $628,000 and $1,675,000 for the three months and year ended December 31, 2009 compared with $647,000 and $3,117,000 for the same periods in 2008. Denison pays a Saskatchewan basic uranium royalty of 4% of gross uranium sales after receiving the benefit of a 1% Saskatchewan resource credit. Denison also pays Saskatchewan capital taxes based on the greater of 3.0% of gross uranium sales or capital tax otherwise computed under the Corporation Capital Tax Act (Saskatchewan). The Government of Saskatchewan also imposes a tiered royalty which ranges from 6% to 15% of gross uranium sales after recovery of mill and mine capital allowances which approximate capital costs. It is likely that Denison will pay tiered royalties in 2010. The Government of Saskatchewan, in conjunction with the uranium industry in Saskatchewan, is reviewing the current tiered royalty structure with a view to altering it to better align it with current and future industry economics.
Mineral Property Exploration
Denison is engaged in uranium exploration, as both operator and non-operator of joint ventures and as operator of its own properties in Canada, the U.S., Mongolia and Zambia. For the three months ended December 31, 2009 exploration expenditures totaled $2,553,000, and $10,120,000 for the year ended December 31, 2009 as compared to $2,080,000 and $20,114,000 for the three months and year ended December 31, 2008.
A majority of the exploration expenditures during 2009 were spent in the Athabasca Basin region of northern Saskatchewan. Denison is engaged in uranium exploration as part of the ARC operated McClean and Midwest joint ventures, as well as on 29 other exploration projects including the Company's 60% owned Wheeler River project. Denison's share of exploration spending on its Canadian properties totaled $2,330,000 of which $2,297,000 was expensed in the statement of operations for the three months ended December 31, 2009 and totaled $8,330,000 of which $7,726,000 was expensed in the statement of operation for the year ended December 31, 2009. For the three months ended December 31, 2008, Canadian exploration spending totaled $733,000 of which $624,000 was expensed and totaled $12,943,000 of which $11,953,000 was expensed for the year ended December 31, 2008.
The results of the three 2009 drilling programs, on the Wheeler River property in the Athabasca Basin, have confirmed that the Phoenix discovery has the potential to host an economically significant, high-grade uranium deposit. In 2009 43 holes were drilled totalling 19,000 metres, with the drilling primarily focussed on the Phoenix discovery. The uranium mineralization extends over a one kilometre strike length and remains open in both directions at a depth of approximately 400 metres.
During the winter program, the first indications of high grade mineralization were identified in hole WR-258 which intersected 11.2% U3O8 over 5.5 metres. The summer drill program included the best intersection to date of 62.6% U3O8 over 6 metres in hole WR-273. The best intersections of the fall program were 32.8% eU3O8, 16.8% U3O8, 12.74% U3O8 and 8.02% U3O8 over 7.6, 9.0, 3.0 and 5.0 metres in holes WR-287, 286,291A and 290, respectively.
Exploration expenditures of $121,000 for the three months ended December 31, 2009 ($916,000 for the three months ended December 31, 2008) and of $2,054,000 for the year ended December 31, 2009 ($4,436,000 for the year ended December 31, 2008) were incurred in Mongolia on the Company's joint venture properties. The Company has a 70% interest in the Gurvan Saihan Joint Venture ("GSJV") in Mongolia. The other parties to the joint venture are the Mongolian government as to 15% and Geologorazvedka, a Russian government entity, as to 15%. At the Ulzit project, mineralization first discovered in 2008 was followed up on and further continuity of this mineralization was confirmed. A new zone of mineralization was discovered at the Choir Depression. Both of these areas of mineralization will require further drilling to confirm potential resources.
In Zambia, the environmental report was approved by the Government of Zambia and work continued on the mining licence and radioactive licence applications.
General and Administrative
General and administrative expenses totaled $3,085,000 for the three months ended December 31, 2009 compared with $3,349,000 for the three months ended December 31, 2008. For the year ended December 31, 2009, general and administrative expenses totaled $13,883,000 compared to $14,754,000 for the same period in 2008. General and administrative expenses consist primarily of payroll and related expenses for personnel, contract and professional services and other overhead expenditures.
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